Someone Asked on Yahoo group
Does 194I / 194C applies for payment of lease rentals for software?
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Simple question has no simple answers !
Covered under Section 194 C ?
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194C covers general works contract this section definitely is not involved in the instant case.
Covered under Section 194I ?
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In my view , if only rental is involved , either Section 194I or 194J may be applicable whereas if there is work contract which involves use of equipments ,section 194C will cover.
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As far as question- “whether lease rental of Software are covered under Section 194I”- is concerned the amended Explanation below Section 194I which states “rent means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,
……..
(d) machinery; or
(e) plant; or
(f) equipment; ………
whether or not any or all of the above are owned by the payee;” -
In the Explanation use of words ” either separately or together” makes it clear that Rental for the purpose of 194I is not what is generally associated with- the property. As such any plant or machinery given on rent either by lease or sub-lease or by any arrangement for use shall be within the ambit of TDS under Section 194I .
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Now the question comes whether Software can be included in the definition of plant or machinery. This is a grey area and both side -Revenue and Assessee -will have their own logic .In my view , since the depreciation @ 60% is allowed on “Computers including computer software” , and there are many case laws where in assessee claimed investment allowance on Software and were allowed also , the rental of software whether by lease or sub-lease or by any arrangement should be covered u/s 194I of the I T Act. provided the Software given on rent was treated by the payee assessee as Plant or Machinery .
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However, in case the software developed by you is a product for sale and then one can make a very good case that “the software” is not within the ambit of either plant or machinery thus its rental is not covered under section 194I.
What about Section 194J ?
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The word Royalty is inserted in Section 194J from 13.7.06 by Taxation Laws Amendment Act . This is very fresh insertion. An explanation is also added under Explanation [ba] stating that meaning of Royalty will be same as given in Explanation 2 to clause (vi) of sub-section (1) of section 9 .Thereby visit to Explanation 2 is important. The definition is reproduced below :
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“For the purposes of this clause, “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) <> (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;
From the aforesid definition , it is beyond the scope of argument that the Software given on Rent does not fall within the ambit of Royalty .Thus such payments shall be , without much controversy, shal fall under Section 194 of the I T Act
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